Definitions under CA, 2013 and proposed by Companies Law Committee

CS Manohar Mishra

Definitions under the Companies Act, 2013 (the Act) and proposed by the Companies Law Committee (CLC)
The Companies Law Committee (CLC) was set up on the 4th June, 2015 to make recommendations to the Government on the issues arising from the implementation of the Companies Act, 2013 as well as on the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility (CSR), the Law Commission and other agencies.

The CLC consisted of a former judge of the Delhi High Court, representatives of the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, the Institute of Company Secretaries of India and the industry. The CLC co-opted representatives from RBI and SEBI as members.

The Report of CLC consists of various changes proposed to be made under the Company Act, 2013 (the Act) and the Rules made thereunder. The various provisions pertaining to the definitions are summarized below.

Section No. Provisions of the Companies Act, 2013 Recommendation of the Company Law Committee Remarks 2(6)-Associate Company “associate company”, in relation to another company, to mean a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company.
Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent of total share capital, or of business decisions under an agreement.

Note: The term “total share capital” means aggregate of the a) paid up equity share capital; and b) convertible preference share capital-as per Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014.

“associate company”, in relation to another company, to mean a company in which the other company has a Significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company.
Explanation .—For the purposes of this clause, “significant influence” means control of at least twenty per cent of the total voting Power, or control of or participation in taking business decisions under an agreement.

The term “ joint venture” may be assigned the same meaning as under Indian Accounting Standard (Ind AS) 28 as part of the Explanation to Section 2(6) itself.

Now significant influence will be determined on the basis of total voting power and not on the basis of total share capital for the purpose of determining whether a company is an associate of another or not. 2(30)-Debenture “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
An exception be made for:

a) instruments covered under Chapter III D of the RBI Act, 1934 in the term ‘debenture’ as defined in Section 2 (30) of the Companies Act, 2013;

b) deposits accepted by banking companies, and flexibility be given to the Central Government, in consultation with RBI and SEBI, as applicable, to carve out other instruments from the definition, as may be required.

“any other instrument of a company evidencing a debt” includes instruments like commercial papers and other money market instrument which are short term fund raising source by eligible companies. Debenture on the other hand is a medium to long –term debt instrument. 2(41)-Financial year “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;

“financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary or associate or joint venture of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;-

Now Associate or Joint Venture of a company incorporated outside India may also apply to the National Company Law Tribunal (NCLT) for different financial year for consolidation of its accounts. Initially it was only for holding or subsidiary of a company incorporated outside India. 2(42)-Foreign Company “foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.

“foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.

Note:

those foreign companies with incidental, insignificant transactions may be exempted from the requirement for registration and other requirements under Chapter XXII by providing for prescriptive powers under section 379.

1. No changes in the definition.
2. The Committee has not prescribed the situation/circumstances/cases under which a transaction to be treated as incidental, insignificant transactions.

3.The Committee may exempt Foreign Companies from registration and other requirements of Chapter XXII (companies (Registration of Foreign Companies) Rules, 2014   by providing for prescriptive powers under section 379 (Application of Act to foreign Companies).

2(46)-Holding Company
“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Explanation: the expression “company” includes any body corporate;

1. Section 2 (87) defines subsidiary company and Explanation (c) to Section 2(87) clarifies that the expression “company” includes a ‘body corporate’. A similar explanation be included in Section 2(46), so that a company incorporated outside India could be considered to be the holding company of another company.

2(49)-Interested Director
“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company

To omit Section 2(49)
Section 184(2) of the Act provides that nature of interest to be disclosed by Directors, but has not used the word Interested Director.

The definition provided in Section 2(49), though much wider, has not been used in the Act and is redundant.

2(57)-Net Worth
“net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

“net worth” means the aggregate value of the paid-up share capital, debit and credit balance of Profit and Loss Account and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation

The net worth of a company reflects its intrinsic value. The previous definition does not include the phrase ‘debit or credit balance of the profit and loss account’

2(76)(viii)-Related Party
“related party”, with reference to a company, means any company which is—

(A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary

“related party”, with reference to a company, means any body corporate (including investing Company or venturer of a Company) which is—

(A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary

The Committee noted that the existing definition used the word any company that means that only those entities which are incorporated in India would come under the purview of definition of Related Party.

This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company

2(85)-Small Company
‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or* and

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act

*Note: MCA vide notification dated 13.02.2015 has amended the definition of Small Company by insertion of “and” instead of “or” between Section 2(85)(i) and (ii).

‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and

(ii) turnover of which as per its latest audited profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act

2(87)-Subsidiary Company “subsidiary company” or “subsidiary”, in relation to any other company
(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed

Explanation.— For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

Note: The term “total share capital” means aggregate of the a) paid up equity share capital; and b) convertible preference share capital-as per Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014

“subsidiary company” or “subsidiary”, in relation to any other company
(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed

Explanation.— For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

Note: The term “total share capital” means aggregate of the a) paid up equity share capital; and b) convertible preference share capital-as per Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014

1. Same amendments as in case of associate company;
2. Now there will be no confusion about ownership of the Company;

2(91)-Turnover “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year; turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year It was suggested by the Institute of Chartered Accountants of India (ICAI) that the definition of turnover should mean the amount of revenue recognised as per the applicable Accounting Standards followed by the company.
Author: CS Manohar Mishra-Associate Member of the ICSI & a Commerce Graduate from Calcutta University, he can be contacted at csmanoharmishra@gmail.com